The United States proposed giving Palestinian refugees land in South America as a radical solution to a problem that has haunted Middle East peace talks for decades.

Condoleezza Rice, the Bush administration's secretary of state, wanted to settle displaced Palestinians in Argentina and Chile as an alternative to letting them return to former homes in Israel and the occupied territories. Rice made the proposal in a June 2008 meeting with US, Israeli and Palestinian negotiators in Berlin, according to minutes of the encounter seen by the Guardian.

During a discussion about international funding to compensate refugees – an estimated 5 million Palestinians are scattered around the Middle East – the US diplomat made a startling suggestion.

"Maybe we will be able to find countries that can contribute in kind. Chile, Argentina, etc (ie, give land)."

The minutes, which are not verbatim, have the initials CR before the quote. Rice was the only participant with those initials.

The proposal seems based on the fact that Chile has a large Palestinian community dating back a century and, like Argentina, has large tracts of sparsely populated land.

It flew in the face of Palestinian insistence that the refugees have the right to return to their ancestral land – a demand Israel has resisted since its foundation in 1948. Carving out a new Palestinian homeland 8,000 miles away in the Andes could theoretically reduce pressure on Israel to return land.

The proposal, not previously disclosed, is a twist on suggestions made in the last century to settle Jews in Madagascar and what is present-day Kenya. It appears to have been influenced by the transfer of 117 Palestinian refugees to Chile between March and April 2008, a few months before the Berlin meeting.

The group had lived in Iraq for many years but was stranded in a grim camp on the Syrian border during post-Saddam Hussein chaos. Chile hosted them in response to a UN appeal, said Carolina Podesta de Footner, a spokeswoman for the South American office of the United Nations High Commissioner for Refugees.

"The UNHCR made an appeal to governments to take these people. Chile was one of the first countries to accept."

As well as having Latin America's largest Palestinian population – estimated at more than 200,000 – Chile had previously accepted refugees from Afghanistan, Colombia and the former Yugoslavia. Podesta said other Palestinians from Iraq were settled in Brazil, Iceland and Romania.

At the time Rice made her proposal the Iraqi Palestinians appeared to be settling well in La Calera, a city north of Santiago. They were greeted with smiles, songs and promises of help with housing, jobs and language training.

But unlike previous Palestinian arrivals – mostly Christians with education and money who chose to move – the refugees were blue-collar conservative Muslims and had struggled to integrate.